RBA governor Philip Lowe (Image: AAP/Joel Carrett)

The Reserve Bank’s (RBA) first board meeting of the year today will see it change the tone (albeit slightly) of its outlook to reflect the obvious improvement in the economy since it last met in early December.

But the big question is how it frames the challenge of cushioning the economy against the elimination of the JobKeeper and JobSeeker subsidies.

Upwards of a million workers are still on some sort of jobs subsidy. If they’re dumped on to the still inadequate unemployment benefit ($40 a day as urged by some business groups such as the Australian Chamber of Commerce and Industry), the RBA will be the only policymaker available to try to soften the impact and protect the recovery in demand, especially from consumers.

AMP’s chief economist Shane Oliver said at the weekend: “Coronavirus still has the potential to create upsets in the short term with uncertainty remaining about how effective vaccines will be. The strong A$ is maintaining pressure on the RBA to extend QE (quantitative easing), and a shift to hawkishness now would be inconsistent with the RBA’s commitment to focus on the achievement of actual inflation sustainably at target.”

But Oliver suggests the bank will tone down its dovish inclinations — particularly its expectation that it will not raise the cash rate for at least three years.

Today’s the start of what will be several days of key messages from the bank: governor Philip Lowe delivers his first speech of the year, and on Friday there’s February statement on monetary policy that will offer fresh forecasts for 2021 and firmer estimates for 2022. This afternoon’s post-meeting statement will give a preview of those forecasts.

The board won’t change interest rates but it might signal changes to the term funding facility to banks and perhaps signal that it will continue its yield management operations up to three years. But the $100 billion targeting of the 10-year bond yield will probably taper from April, suggesting the start of a return to more normal monetary policy.

As well as good retail sales data, the bank’s monthly Commodity Price Index is up about 11% since the last meeting and in January hit the highest level in a decade after a surge in iron ore, copper, wheat and LNG prices.

That has been clipped by the 9% rise in the value of the Aussie dollar against the greenback in the past year (although the gains have been much less against other currencies).

House prices rose in January to be up 2.7% in the past year; housing finance showed a 31% jump over the year to December, with most of that in finance for owner-occupied housing; car sales jumped in the closing months of 2020 with sales in December above those in December 2019.

Job vacancies in the three months to November rose above the level of the same period in 2019. Job ads continue to rise and the trade surplus for December hit $9 billion.

Usually that would be the signal for the RBA to start tightening monetary policy, but there is little or no inflation and most of that is being driven by government action — tobacco and alcohol tax increases each quarter and the changes to childcare costs.

And there is no wage pressure. Workers face years without a decent pay rise.

So there’s a lot of spare capacity in the economy, which will be revealed once the job subsidies are ended and underemployment figures rise to match the real state of the jobs market.

The RBA will have to be ready to do a clean-up job if dropping JobKeeper and reducing JobSeeker back to punitive levels has a too dramatic negative effect on demand.